Ch. 12 A Firm's Sources of Financing

Which of these is an informal agreement or understanding between the borrower and the bank as to the maximum amount of credit the bank will provide the borrower at any one time?

Line of credit

Which of these are groups of individuals who form limited partnerships for the purpose of raising capital from large institutional investors?

formal venture capitalists

To make an informed decision, a small business owner needs to recognize and understand trade-offs between debt and equity with regards to all of the following EXCEPT:

intangible assets.

The primary source of financing for most small business startups is

personal savings.

Private placement stock is usually sold to all of the following EXCEPT:

the public.

Raising new capital through equity financing would mean giving up a part of the firm's ownership, and most owners of small firms resist giving up control to outsiders. a. True b. False

True. Correct. Raising new capital through equity financing would mean giving up a part of the firm's ownership, and most owners of small firms resist giving up control to outsider because they do not want to be accountable in any way to minority owners, much less take the chance of possibly losing control of the business.

Tangible assets serve as great collateral when a business is requesting a bank loan. a. True b. False

True. Correct. Tangible assets, which can be seen and touched, include inventory, equipment, and buildings and are great collateral when a firm is requesting a bank loan.

All of the following are types of bank loans EXCEPT:(lines of credit.term loan.mortgage.)

equity.

_____ is a loan for which certain items of inventory or other movable property serve as collateral.

Chattel mortgage

As long as the owner's rate of return is greater than the cost of debt, return on equity will increase as the company uses more debt.

True. Correct. If a firm's return on its assets (operating profits ÷ total assets) is less than the cost of the debt (interest rate), the owners' return on equity will decrease as the firm uses more debt.

The five Cs of credit consist of all of the following EXCEPT:(character.capacity.capital.)

credit card.

A risky way to finance is through

debt.

All of the following are primary SBA program's EXCEPT:

the Venture Capital program.

Which of these basic firm characteristics significantly affect how a business is financed?

the nature of its assets

An initial public offering (IPO) occurs when a company sells stock to selected insiders.

False. Correct. Initial public offering (IPO) is the issuance of stock to be traded in public financial markets.

In practice, credit cards are insignificant source of financing for all entrepreneurs, particularly early in the game.

False. Correct. Using credit cards to help finance a small business has become increasingly common among entrepreneurs. It has been estimated that approximately half of all entrepreneurs have used credit cards at one time or another to finance a startup or business expansion.

A down payment of _____ percent is usually required for equipment purchases on an installment basis through an equipment loan.

25

What is the customary time period for trade credit?

30 days

_____ is the process of raising very small investments from a large number of investors online.

Crowdfunding

_____ are generally used to finance equipment with a useful life corresponding to the loan's term.

Term loans